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AGB 301 Food and Fiber Marketing Midterm review

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What is Agribusiness
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The sum of all institutions, firms and activities involved in the commercial production and marketing of food
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What is food marketing
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activities needed at all stages in the food system to facilitate the exchange of food products and services which satisfies the needs and wants of consumers
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What is the food marketing system
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R+d and Commodities INPUTS FARMERS/PRODUCERS PROCESSORS DISTRIBUTORS CONSUMERS
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How does marketing add value
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all procedures from the raw to the final product add utility – form – place – time – possession utilities
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How are Farmers, Middlemen, and Consumers Related?
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1.8 million farmers 35000 processing plants 40000 grocery wholesales 240000 grocery stores 4000000 food places 3.06 millioin consumers Each exchanges resources and goods with the other to satisfy needs and wants
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Physical function utilites
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Form Utility processing and packaging Place utility transportation Time utility storage – risk
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Exchange function
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possesion utility pricing – risk
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What are the differences between the 4 industry structures?
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the ease of entry into the market gets proressively more difficult, while the number of total sellers decreases and price influence increases from perfect competition to monopoly.
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Perfect competition
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large number of sellers, ease of entry, homogeneous product.. ex: farmers
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Monopolistic competition
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many sellers, high product differentiation, possible market entry, limited price influence
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Monopoly
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one seller, high product differentiation, market entry blocked, high price influence ex: microsoft
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oligopoly
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few sellers, some prod. differentiation, greater price influence,
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What is Macro vs Micromarketing
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Macro – how the system is organized how it operates micro- what decisions are being made how, when, what, where, to buy/sell
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What is Marketing
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the activity for creating and delivering offerings that benefit the organization, its stakeholders and society
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When occurs a need/want?
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A need occurs when a person feels deprived of basic necessities such as food/clothing/shelter. A want is a need that is shaped by a person’s knowledge, culture, and personality.
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What is a target market?
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One or more specific groups of potential consumers toward which an organization directs its marketing program.
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How does effective marketing utilize the needs/wants of consumers?
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1) Discover consumer needs through research 2) Satisfy consumer needs by implementing marketing program with the appropriate marketing mix
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What is the marketing mix?
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• Product Good, Service, or Idea Variety, quality, design, brand • Price List price, discount • Promotion Communication between seller and buyer: advertising, public relations (PR) • Place Sales channels, inventory, transportation
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What is customer value?
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All benefits received by targeted buyer • Quality, • Convenience, • On-time delivery, and • Before- and after-sale service at specific price
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What impacts demand for a food product?
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Demand is influenced by PO – products own price PS – price of substitute goods I – income T – tastes
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Price elasticity of demand
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measures how much change in quantity of a good occurs with a change in price
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What is the elasticity of demand?
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% change Q1/ % change in Q2 >1 Elastic <1 inelastic = 1 unitary
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PED Revenue implications
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Elastic cutting price increases revenue increasing price decreases revenue Inelastic cutting price decreases revenue increasing price increases revenue (agriculture is inelastic)
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What is the price flexibility?
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it is the reciprocal of the PED
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What is the cross price elasticity of demand
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XED = % change of quantity of good 1 / % change in price of good 2
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Interpretations of XED
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Positive – substitutes Negative – complements 0 – independent
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What is the income elasticity of demand?
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% change in quantity / % change in income indicates potential changes of shifts in the demand curve as income changes
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Interpreting IED
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>1 a luxury and a normal good <1 a necessity and a normal good <0 an inferior good
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What impacts supply?
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impacted by: PO- products own price PS – price of alternative goods that compete for the same resources PI – input prices T – technological advances PES – % change in quantity supplied / % change in price
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What is the marketing margin?
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The difference between two prices or values Retail value – marketing costs and profits = farm value also called the price spread
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What is technical or operational efficiency?
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Marketing utility / marketing cost
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Economies of Scale
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as the scale of operation increases the per unit cost decreases
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What is pricing efficiency?
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measures how well the price system allocates resources coordinates market decisions satisfies customer wants
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What is integration?
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combining separate marketing functions, decisions, and activities into a single firm
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What are reasons for integration?
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Profits Cost Economies Marketing Economies Risk Management, Diversification Growth, Market Share Supply, Quality Control Bargaining Power Competitive Advantage
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What is vertical integration? backward / forward integration
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combination of two vertical inputs backward: purchases toward inputs forward: toward the consumer
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What is horizontal integration?
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purchasing of other companies w/ a similar type across the board ex: processor a buys processor b
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What is the definition of grading?
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sorting a product into quality classifications according to standards agreed upon by an industry
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What does quality mean in the context of grading?
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Attributes of a commodity that influence its acceptability to a group of buyers, and therefore, the price they are willing to pay for it
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What is the purpose of grading systems?
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• Price can be established for each grade • With grading of commodity • Establish the price • Facilitate sale • With grading • Commodities sold on description!
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How does efficiency relate to grading?
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Better allocation according to demand Facilitates futures trading Saves time for buyer/seller/lender Combined storage of various commodities or pooled sales
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What is the difference between grades and brands?
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Grades: Homogeneous classes of food products Increased price competition discouraged R+D and innovation Brands: differentiation of food products increase non price competition – loyalty encourage R + D and innovation
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What are criteria for grading systems?
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• Accept marketing concept in grading (see page 10) • Identification of important end-user characteristics • Cost effective: fast and accurate • Objectivity in measuring characteristics
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What are characteristics of commodity marketing?
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Different from marketing of consumer products • Farmers are price-takers • Price can only be influenced by the TOTAL number of farmers • Price is determined by finding: total demand= total supply
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What is risk management?
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the basic idea of risk management is the risk/return tradeoff– trying to maximize profits while also minimizing risk
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What are the three main types of risk?
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Physical yield and quality variations Financial Credit and interest rate risks Price contracts and cash markets
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Why is the futures market important?
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The primary purpose of the futures market is to: • allow businesses associated with the production and processing of a commodity to protect themselves from undesirable changes in the commodity price = risk management tool
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Evolution of futures market contracts abroad and U.S.
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What is the futures contract?
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• Futures contract – set of promises between two parties • Seller: to deliver certain commodity (go short) • Delivery time in the month • Might be months/years in the future • Buyer: to accept commodity (go long) • Payment time in the month • Quantity of good • Quality of good • Place of delivery
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What is a speculator?
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• A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements. • Assumes market risk • Adds liquidity to the market • Maintains price consistency
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What is hedging?
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• Hedging – use of the futures market as a temporary substitute for a cash purchase or sale to be made at some later date. • Shifts the risk of adverse price changes from a producer or user to a different party or person.
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Hedging terminology
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BuLLs: go Long • BUY futures or options contracts (BUY/LONG) • Expects rising prices BearS: go Short • SOLD futures or options contracts (SOLD/SHORT) • Expects falling prices
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What is the difference between speculating and hedging?
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Hedgers • Avoid price risk • Attempt to protect against price changes Speculators • Accept price risk • Try to profit from price changes
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What is a short hedge?
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Short Hedge – taking a short or sell position in the futures market to offset a long position in the cash market
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Calculation of a short hedge with a T account
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Why is hedging useful?
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• Price Risk • Not KNOWN whether prices will increase • Danger of suffering financial loss • Most firms operate on a narrow margin • Minor price changes result in major loss
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Who hedges?
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• Commercials – Elevators, processors, and exporters (e.g. Cargill, ADM) • Producers of grain and livestock
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What is the Basis?
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the difference between the current cash price and the price in the futures market.
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3 components of the Basis
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Transportation cost Carrying cost Local factors
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What is a Long Hedge?
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•The price of a physical commodity is protected by purchasing, or going long in the futures market.
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Calculation of a long hedge with a T account
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Advantages of hedging
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Hedgers limit price risk • A price has been locked in for a commodity • A hedge can allow you to lock in a price for as long as 18 months • Provides marketing flexibility • Futures market is liquid enough to provide a number of buyers and sellers
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Disadvantages of Hedging
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• You have to sell or buy grain in 5000 bushel contracts • There are similar requirements for livestock. • You have to have cash available for margin accounts.
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Strengthening and weakening of the Basis
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• Widening or weak Basis – will NOT benefit the short hedger • Basis is becoming less positive/more negative: Cash is below futures • Narrowing or strong Basis – will benefit the short hedger • Basis is becoming more positive/less negative: Cash is above futures